237 F.

2d 424
56-2 USTC P 9949

RICH LUMBER COMPANY, Incorporated, Plaintiff,

Appellant,
v.
UNITED STATES of America, Defendant, Appellee.
No. 5085.

United States Court of Appeals First Circuit.

Oct. 4, 1956.

Jackson J. Holtz, Boston, Mass., with whom Hershel Zonderman, David

A. Rose, and Holtz & Rose, Boston, Mass., were on brief, for appellant.
Helen A. Buckley, Atty., Dept. of Justice, Washington, D.C., with whom
Charles K. Rice, Acting Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of
Justice, Washington, D.C., Anthony Julian, U.S. Atty., and Arthur I.
Weinberg, Asst. U.S. Atty., Boston, Mass., were on brief, for appellee.
Before MAGRUDER, Chief Judge, and WOODBURY and HARTIGAN,
Circuit Judges.
WOODBURY, Circuit Judge.

This appeal from a judgment dismissing an action to recover a deficiency in

income taxes and interest thereon assessed against and paid by the plaintiff
presents but a single question. It is whether a conceded loss in an agreed
amount sustained by the taxpayer as the result of its sale to the United States of
certain timber lands in Vermont was 'sustained during the taxable year' 1947
within the meaning of 23(f) of the Internal Revenue Code of 1939, 26
U.S.C.A., quoted in the margin.1

The taxpayer is a corporation having its principal place of business in

Massachusetts which kept its books and filed its income tax returns on the
calendar year accrual basis. In 1921 it acquired a substantial tract of timber land
in Bennington County, Vermont, and on May 1, 1947, after preliminary

negotiations between its treasurer and the supervisor of the Green Mountain
National Forest, it executed a Land Purchase Option and Contract of Form
1009 with the United States Department of Agriculture. Thereupon it ceased all
lumbering operations upon the tract.
3

By the terms of this option and contract the taxpayer agreed to sell its
Bennington County lands, said to contain 4793 acres, 'more or less,' at $9.25
per acre on condition that within twelve months it offer be accepted in writing
and notice thereof be communicated to its treasurer. The contract further
provided that during the option period it would not do or suffer any act by
which the value or title to the lands might be diminished or encumbered, and
that during that period the United States should have the right 'at all necessary
and reasonable times' to enter upon the land 'for all national-forest purposes.'

On May 20, 1947, the Secretary of Agriculture accepted the option on behalf of
the United States subject to the approval of the National Forest Reservation
Commission. The Commission gave its approval on the same day and the
taxpayer received written notice of these actions on May 29, 1947. Thereupon
the option agreement ripened into a mutually binding contract of purchase and
sale. By the terms of that contract the taxpayer agreed to furnish at its expense
an abstract, certificate, or other evidence of title satisfactory to the Attorney
General of the United States, or should it fail to do so within three months of
acceptance of the option to bear the cost of the same, and in addition agreed
that if it should refuse to convey or fail to make satisfactory title, it would
submit to condemnation by the United States at the contract price per acre. It
further agreed that upon acceptance of the option the United States Might upon
written notice from the regional forester, but not otherwise, use, occupy and
administer without charge any or all of the land for national-forest purposes.
And it also agreed that it would bear 'any loss or damage occurring prior to the
vesting of satisfactory title in the United States of America by reason of the
unauthorized cutting or removal or products (from the land) or because of fire'
and that 'in the event any such loss or damage occurs, the United States may
refuse, without liability, to accept conveyance of said land, or it may elect to
accept conveyance upon an equitable adjustment of the purchase price.' The
United States in return agreed to purchase the land at the contract price per
acre, or, in the event the taxpayer could not make satisfactory title, to take by
condemnation at the agreed price per acre so much of the land as the taxpayer
actually owned, that is, had a paramount title.

Upon acceptance of the option the taxpayer abandoned its plan to set up a
sawmill on the tract and purchased other timberlands for its use. It also
promptly engaged the services of a competent title attorney who searched the

records, prepared an abstract, and in August informed the taxpayer that in his
opinion it had a marketable title except for claims made against three small
parcels. The taxpayer fully settled the claims against two of the parcels in 1947
and by the end of that year the adverse claims against the third parcel had been
settled but the papers necessary to effectuate the settlement had not been
passed. Also in 1947 the United States started to survey the property to
determine its exact acreage. This was the state of affairs at the end of the
calendar year 1947.
6

In 1949 the taxpayer was informed by letter that the Government's survey
revealed that there were only 4562.8 acres in the tract of which 42.3 were found
not to belong to the taxpayer, and hence the net acreage to be acquired from it
was 4520.5 acres. The letter went on to state that the tract was made up of
many small parcels the boundaries of which were vague and indefinite and
hence their contiguity was not clear. Wherefore, the letter continued, the United
States could not obtain a safe title by deed and so would have to proceed by
condemnation. The letter further stated: 'The purpose of condemnation
proceedings is not to acquire land against the wishes of the apparent owner but
merely for the purpose of perfecting a title in the Government which cannot
reasonably be accepted by deed. It is not the policy to proceed in condemnation
under an option if some other party who did not execute the option has a
superior title.' This, the letter continued, was the reason for 'dropping' the 42.3
acre parcel from the condemnation proceeding.

Condemnation proceedings were instituted by the United States in 1949 and in

1950 the taxpayer received $41,814.62 for its land, that is, $9.25 per acre for
4520.5 acres.

In its return for the calendar year 1947 the taxpayer reported a loss on this
transaction of $98,658.08 and a net loss for the year of $84,640.40. In addition
it filed an application for a net operating loss carry-back against its 1945
taxable income. Both the deduction and the application for carry-back
adjustment were disallowed and in consequence the taxpayer was assessed a
deficiency which it paid with the interest thereon in the amount of $31,108.60.

The amount of the taxpayer's loss is not disputed. The sole issue, as stated at
the outset of this opinion, is whether the taxpayer 'sustained' the loss in 1947.
The District Court on the authority of Lucas v. North Texas Lumber Co., 1930,
281 U.S. 11, 50 S.Ct. 184, 74 L.Ed. 668, held that its loss was not 'sustained' in
that year and we agree.

10

Neither the statute nor the decisions construing it lay down any hard and fast

10

Neither the statute nor the decisions construing it lay down any hard and fast
rules for determining when a loss is 'sustained' for the purposes of income
taxation. The Supreme Court in Lucas v. American Code Co., 1930, 280 U.S.
445, 449, 50 S.Ct. 202, 203, 74 L.Ed. 538 said: 'The general requirement that
losses be deducted in the year in which they are sustained calls for a practical,
not a legal, test.' And the courts in applying this practical test have recognized
that no single factor will invariably control determination of the question.
Viewing the transaction 'as a whole and in the light of realism and practicality',
as the court said in Commissioner of Internal Revenue v. Segall, 6 Cir., 1940,
114 F.2d 706, 709, certiorari denied, 1941, 313 U.S. 562, 61 S.Ct. 838, 85
L.Ed. 1522, no doubt actual passage of title is a highly significant event,
although maybe not always the controlling one. See Brown Lumber Co. v.
Commissioner, 1929, 59 App.D.C. 110, 35 F.2d 880; Frost Lumber Industries
v. Commissioner, 5 Cir., 1942, 128 F.2d 693. Certainly in the case at bar title to
the taxpayer's timberland did not pass to the United States in 1947. Nor even
did full possession pass to the United States in that year. The most that it
acquired during that year in the way of possession was the right on written
notice to enter upon the tract to make use of it for national-forest purposes; the
right to use the tract for other purposes remained in the taxpayer provided it did
not diminish the value of the land, as by cutting and removing timber. Thus the
taxpayer could still use, or perhaps for a fee allow others to use, the property
for recreational or any other purposes which would not reduce its value. And
throughout 1947 the risk of loss by fire or unauthorized cutting remained in the
taxpayer, and in the event of loss from either cause the United States could
either refuse to take the land or take it at an equitably adjusted price.

11

While some of the incidents of ownership certainly passed to the United States
in 1947 by no means all of them did. Important incidents remained in the
taxpayer throughout that year, such as a qualified right of possession and the
risk of loss. Furthermore the United States during that year was not
unconditionally and irrevocably bound to take the property and pay the agreed
price per acre. These factors bring the case within the scope of the decision in
Lucas v. North Texas Lumber Co., supra, for in that case a calendar year
accrual basis taxpayer was not allowed to accrue a gain from the sale of timber
lands in 1916, the year in which it gave an option to purchase the same and in
which the optionee found the title satisfactory, arranged for financing and gave
notice of acceptance of the option, but was required to report the gain in 1917
when the transaction was actually closed. The Court said:

12

'An executory contract of sale was created by the option and notice, December
30, 1916. In the notice, the purchaser declared itself ready to close the
transaction and pay the purchase price 'as soon as the papers were prepared.'
Respondent did not prepare the papers necessary to effect the transfer or make

tender of title or possession or demand the purchase price in 1916. The title and
right of possession remained in it until the transaction was closed. Consequently
unconditional liability of vendee for the purchase price was not created in that
year. Gober v. Hart, 36 Tex. 139. Cf. United States v. Anderson, 269 U.S. 422,
441, 46 S.Ct. 131, 70 L.Ed. 347: American National, Co. v. United States, 274
U.S. 99, 47 S.Ct. 520, 71 L.Ed. 946. The entry of the purchase price in
respondent's accounts as income in that year was not warranted. Respondent
was not entitled to make return or have the tax computed on that basis, as
clearly it did not reflect 1916 income.'
13

This language covers the case at bar.

14

The Judgment of the District Court is affirmed.

' 23. Deductions from gross income

'In computing net income there shall be allowed as deductions:
******
'(f) Losses by corporations.
'In the case of a corporation, losses sustained during the taxable year and not
compensated for by insurance or otherwise.'